2014 (12) TMI 1397 - AT - Income Tax

Disallowance of material expenses - expenses on account of steel, cement, glass, aluminum etc. were supported by the purchase bills, that the expenses claimed in respect of bricks, sand, earth etc. were not fully supported by proper bills, that many of the expenses regarding those items were claimed on the basis of self made cash vouchers and were not supported by Pucca bills of purchase, that same were not fully verifiable - HELD THAT - AO had called for the details of various expenses incurred by the assessee, that it had furnished all the necessary details during the assessment proceedings, that the AO made a disallowance on estimate basis, that the audited accounts of the assessee were available to the AO and in the audit report there was nothing that could lead to the conclusion that the assessee had not incurred expenditure claimed in the books of account, that similar kind of expenses were disallowed in the earlier years by the AO were deleted by the Tribunal. We are of the opinion that the AO cannot make any addition/disallowance without giving proper reasons. As a representative of the State, he is duty bound to pass a reasoned order. A reasoned order needs basic facts their analysis and conclusion. In the case under consideration, estimated disallowance has been made without assigning proper reasons. The AO has not rejected the books of account and has not pointed out any defects in the books. In these circumstances, in our opinion, he was not justified in making the disallowance. Therefore, confirming the order of the FAA, we decide the first ground of appeal against the AO. Disallowance of labour and contingency expenses - HELD THAT - We find that the assessee-firm had furnished books of account and audited statement of accounts and the AO was not able to pin-point the defects in such documents, that the quantity of material used in labour charges incurred were certified from time to time by the competent authorities and the AO was not able to negate the claim made by the assessee. It is also found that the AO had not disputed about the labour and contingency payment though he had made an ad hoc disallowance. We are of the opinion that the tax liability cannot be fastened to the assessee by the AO without bringing some positive evidence against the assessee on record, that the disallowance or addition has to be backed by some documentary/oral evidence which could prove that the claim made by it of an expenditure was not genuine. In the case under consideration, the AO has made a lump sum disallowance, but same is not backed by any evidence. We are of the opinion that the order of the FAA does not suffer from any legal or factual infirmity. - Decided against revenue.

Summary

Issues:
1. Disallowance of material expenses
2. Disallowance of labour and contingency expenses

Disallowance of Material Expenses:
The Assessing Officer (AO) disallowed Rs.5,00,000 out of material expenses claimed by the assessee, citing lack of proper verification. The First Appellate Authority (FAA) deleted the disallowance, emphasizing that the AO failed to provide any material evidence before making the disallowance. The FAA highlighted that the AO's action lacked justification and proper reasoning, contrary to the provisions of the Act. The Tribunal upheld the FAA's decision, stating that the AO cannot make additions without proper reasons and that the disallowance was unjustified without rejecting the books of account or pointing out specific defects.

Disallowance of Labour and Contingency Expenses:
The AO disallowed Rs.10,00,000 out of the claimed labour and contingency expenses, alleging lack of complete verifiability. The FAA overturned this disallowance, noting that the assessee maintained proper books of account, which were audited, and the AO failed to identify any defects. The FAA emphasized that no disallowance could be made based on estimation without concrete evidence. The Tribunal supported the FAA's decision, stating that the AO's lump sum disallowance lacked evidentiary support and that tax liability cannot be imposed without positive evidence against the assessee. The Tribunal concluded that the AO's action was unjustified and confirmed the FAA's order.

In both instances, the Tribunal ruled against the AO, dismissing the appeal and upholding the decisions of the FAA regarding the disallowance of material and labour/contingency expenses. The judgment highlighted the importance of proper reasoning, evidence, and adherence to legal provisions in making disallowances, emphasizing the need for concrete proof before imposing tax liabilities on the assessee.